The HP comeback is under way, led by blade servers, notebooks, and especially ink
Business and Law Features

The HP comeback is under way, led by blade servers, notebooks, and especially ink

Scott M. Fulton III

San Jose (CA) - It looks bad, on the surface, for a moment. But after you take into account the huge restructuring charge Hewlett-Packard absorbed - which, even now, includes the bitter pill the company has to swallow for having acquired Compaq - the company reports it's actually significantly healthier across the board, with PC sales actually contributing to its hopeful outlook.

If analysts needed any clearer indicator that new CEO Mark Hurd was turning the company around, it would need to be printed on their foreheads. Luckily, HP has a better printing business these days, for just that task. Once a troubled segment of a troubled company, the imaging and printing division of HP saw a 4 percent revenue increase over Q4 '04. There's still some weakness in the consumer printing and imaging hardware segment, Hurd reported in HP's regular quarterly conference call this afternoon, though the 4 percent per annum decline in consumer hardware revenue was made up for by a 4 percent increase in commercial hardware revenue, and a 7 percent increase in revenue from the supplies division.

HP is in the ink business, in a dramatic way. We talk about the company in the context of a computer manufacturer, for the sake of driving reader interest. Yet in reality, the Personal Systems division responsible for HP's PC business drove only 2 percent of the company's revenue this past quarter - and that's the fifth straight quarter of improvement for that division, said Hurd. Meanwhile, the imaging and printing division drove 13.2 percent of HP's revenue, with supplies being one of the company's key growth drivers.

Hurd singled out HP's new scalable print technology - its new line of digital printheads - as essential to that division's growth. Leaving nothing to speculation, he told analysts, "We are focused on driving unit growth of high ink consumption units, and we're confident that [scalable print and other new technologies] will drive solid supplies growth."

In response to one analyst's question about HP's possible response to printer competitor Lexmark's across-the-board price cut, Hurd remarked, "I do hear a lot of commentary about pricing, but we're not trying to be the 'price leader' in the marketplace. We have certain segments that are high-consumption segments that we target; we think we know what the premium should be, relative to competition, and we work within those models to try to get to the best destination that we think makes sense." When he first came to the company, Hurd had established a reputation for building enormously complex stochastic business models; whenever he needs to show his managerial prowess, Hurd flashes his models, if you will. In this case, Hurd implied that the business model for establishing a premium price isn't governed by what one competitor does and how HP responds, but by more complex economic and consumer-oriented factors, one of which is ink consumption rates.

It's also worth noting that HP earns over four times more from its enterprise storage and server division (ESS) as it does from its personal systems. Driving that division's 10 percent per annum increase in revenue is HP's blade servers, which commanded a 65 percent revenue increase over the same quarter of 2005. The storage portion alone drove a respectable 17% per annum revenue increase, with midrange EVA storage servers accounting for a 44 percent increase over Q4 '04.

The services division - which takes HP's consulting business into account - accounts for just under four times the revenue of personal systems. Performance there would actually have been better, Hurd said, if that division didn't have to take into account employee bonuses. "As in the third quarter, HP services margins were pressured by the company bonus accrual, given the head count intensity of the business," he remarked. "If you exclude the fourth quarter bonus accrual, operating margins in managed services, and consulting and integration, were at their best levels in two and three years, respectively."

It's nice to dream about such numbers, but the facts have to be taken into account: A consulting business has a lot of heads. "We need to deliver solid margins while absorbing the company bonus payments," Hurd almost lamented, "and we'll continue to work hard on the operations of the business to drive to this goal."

With regard to the Personal Systems Group (PSG) that is the focus of most of our HP coverage in TG Daily, revenue increased by 9 percent year-over-year, to $7.1 billion, marking the fifth consecutive quarter of operating margin improvement, Hurd reported. The focus of PSG's strengths this quarter is notebook systems, where revenue increased by 23 percent over Q4 2004, and shipments of notebook systems increased 48 percent over the prior year. "The team has done an excellent job turning around the profitability of the PC business," he stated, "and operating margins are now increased for each of the last four quarters." For the full year 2005, he added, PSG margins now stand at 2.5 percent of revenue.

Echoing a comment he made in the third-quarter conference call, Hurd stated, "Coming to the company, I really hadn't heard a lot of illumination about the consistent improvement in the PC business, in the PSG organization. The improvement has been going on over a period of time, so when you go look at what's happened over the past four years, it's been really steady improvement year-by-year, and frankly, quarter-by-quarter. And I think it reflects a number of disciplines going on simultaneously." For instance, he said, HP enjoys a strong relationship in the retail sector, which translates into strength in consumer sales. "This hasn't been a one-quarter story," he added. "This has been a multi-quarter story, and frankly, a multi-year story.

HP's chief financial officer, Robert P. Wayman, warned that next quarter's numbers may not be so rosy, by virtue of an anticipated, seasonal two to three percent drop in purchasing activity.